nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒12‒01
seven papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Fiscal rules for debt sustainability in emerging markets: the impact of volatility and default risk By Adrian Penalver; Gregory Thwaites
  2. Returns to equity, investment and Q: evidence from the United Kingdom By Simon Price; Christoph Schleicher
  3. Who writes the rules for hostile takeovers, and why? - The peculiar divergence of US and UK takeover regulations By John Armour; David A. Skeel, Jr.
  4. The costs and benefits of secured creditor control in bankruptcy: Evidence from the UK By John Armour; Audrey Hsu; Adrian Walters
  5. Microfinance with divisible investment projects By BECCHETTI LEONARDO; PISANI FABIO
  6. The Securitisation of Trade Receivables, Agency Conflicts, and Reactions of Lenders By Johannes Schmittat
  7. Fair Disclosure and Investor Asymmetric Awareness in Stock Markets By Liu, Zhen

  1. By: Adrian Penalver; Gregory Thwaites
    Abstract: The determinants of public debt dynamics – real interest rates, the real exchange rate, output growth and the primary fiscal balance – are typically more volatile in emerging market economies than in industrialised countries. Capital markets also typically demand higher interest rates from emerging markets when their debt dynamics deteriorate. This paper considers how these characteristics affect the choice of fiscal policy rules in emerging markets. We estimate an econometric model of the determinants of public debt dynamics on Brazilian data and use this model to simulate the effect of different fiscal policy rules for future paths of debt. We then derive the set of fiscal policy rules which stabilise public debt dynamics. We find that macroeconomic forecast uncertainty and feedback among the endogenous variables (principally from the debt-GDP ratio to interest rates) force the policy rule to be significantly more responsive to changes in public debt. Rules that would stabilise debt in a fully known world may not do so when the policymaker is faced with a realistic pattern of shocks. The method we employ may be a useful addition to the toolkit of domestic and international policymakers when assessing fiscal rules and debt sustainability.
  2. By: Simon Price; Christoph Schleicher
    Abstract: Conventional wisdom has it that Tobin’s Q cannot help explain aggregate investment. This is puzzling, as recent evidence suggests the closely related user cost approach can do so. We do not attempt to explain this puzzle. Instead, we take an entirely different approach, not using the first-order conditions from the firm’s maximisation problem but instead exploiting the present-value expression for the firm’s value. The standard linearised present-value asset price decomposition suggests that Q should be able to predict other variables, such as stock returns. Using UK data we find that it has strong long-horizon predictive power for debt accumulation, stock returns and UK business investment. The correctly signed results on both returns and investment appear to be robust, and are supported by the commonly used and bootstrapped standard error corrections, as well as recently developed asymptotic corrections.
  3. By: John Armour; David A. Skeel, Jr.
    Abstract: Hostile takeovers are commonly thought to play a key role in rendering managers accountable to dispersed shareholders in the "Anglo-American" system of corporate governance. Yet surprisingly little attention has been paid to the very significant differences in takeover regulation between the two most prominent jurisdictions. In the UK, defensive tactics by target managers are prohibited, whereas Delaware law gives US managers a good deal of room to maneuver. Existing accounts of this difference focus on alleged pathologies in competitive federalism in the US. In contrast, we focus on the "supply-side" of rule production, by examining the evolution of the two regimes from a public choice perspective. We suggest that the content of the rules has been crucially influenced by differences in the mode of regulation. In the UK, self-regulation of takeovers has led to a regime largely driven by the interests of institutional investors, whereas the dynamics of judicial law-making in the US have benefited managers by making it relatively difficult for shareholders to influence the rules. Moreover, it was never possible for Wall Street to "privatize" takeovers in the same way as the City of London, because US federal regulation in the 1930s both pre-empted self-regulation and restricted the ability of institutional investors to coordinate.
    Keywords: Hostile takeovers; History of corporate law; Comparative corporate law; Self-regulation; Institutional investors; Evolution of law; Anglo-American corporate governance
    JEL: G23 G34 G38 K22 N20 N40
    Date: 2006–09
  4. By: John Armour; Audrey Hsu; Adrian Walters
    Abstract: Recent theoretical literature has debated the desirability of permitting debtors to contract with lenders over control rights in bankruptcy. Proponents point to the monitoring benefits brought from concentrating control rights in the hands of a single lender. Detractors point to the costs imposed on other creditors by a senior claimant's inadequate incentives to maximise net recoveries. The UK provides the setting for a natural experiment regarding these theories. Until recently, UK bankruptcy law permitted firms to give complete ex post control to secured creditors, through a procedure known as Receivership. Receivership was replaced in 2003 by a new procedure, Administration, which was intended to introduce greater accountability to unsecured creditors to the governance of bankrupt firms, through a combination of voting rights and fiduciary duties. We present empirical findings from a hand-coded sample of 348 bankruptcies from both before and after the change in the law, supplemented with qualitative interview data. We find robust evidence that whilst gross realisations have increased following the change in the law, these have tended to be eaten up by concomitantly increased bankruptcy costs. The net result has been that creditor recoveries have remained unchanged. This implies that dispersed and concentrated creditor governance in bankruptcy may be functionally equivalent.
    Keywords: Bankruptcy costs; Contract bankruptcy; Secured creditor control, UK, receivership, administration
    JEL: G33 K22 G21
    Date: 2006–09
    Abstract: In this paper we examine how the traditional results of the microfinance literature change under the project divisibility assumption. We show that, under standard debt contracts, loan size and borrower profits are unchanged when lending to uncollateralized borrowers with an individual lending or with a group lending/joint liability scheme, as the positive effect of the latter on bank risk is offset by a negative effect on borrowers’ optimal loan size. We also show that participated (debt plus profit sharing) loan contracts which reduce the lending rate (with respect to standard debt contracts) generate higher loan size and output, but lower borrower profits. Such contracts, however, cannot be enforced in presence of ex post hidden information, unless costly state verification by the lender is possible and economically convenient. We finally show that a problem of borrower heterogeneity may be solved by the lender with a participated loan/group lending scheme since, in this case, it is possible to devise a menu of contracts discriminating among heterogeneous quality groups. In such case we show that, under reasonable parametric conditions, a participated loan/group lending contract ensures higher profits to the high quality borrower than a standard debt individual lending contract.
    Date: 2006–10
  6. By: Johannes Schmittat (Department of Finance and Accounting, EUROPEAN BUSINESS SCHOOL (ebs), International University Schloß Reichartshausen)
    Abstract: As the securitization of trade receivables is opening up for smaller volumes, and therefore gaining popularity among smaller German firms, the effects of this financing method are of special interest. Iacobucci and Winter (2005) suggest that Asset Backed Securities (ABS) reduce agency costs. However, in the special case of securitizing trade receivables, the separation of asset and originator risks is not perfect, making the reduction of agency costs questionable. Furthermore, wealth transfers from lenders to equity holders might be possible by assigning preferred claims over receivables to the ABS holders. These issues have been analyzed using four intensive clinical studies and ten additional case studies of German firms. The results show that monitoring costs are not reduced (the SPV monitors the originator very closely), and it is not possible to enhance the efficiency of the monitoring systems (default noise is only eliminated for very extreme defaults). However, ABS may be used as a signaling device by smaller companies and reduces the underinvestment problem by adding financial flexibility, as described by Froot, Scharfstein, and Stein (1993). Concerning the wealth transfers, the reactions of lending banks are very interesting and surprising. In only two cases was there a reduction of credit volume. Additionally, for smaller firms, the shortening of the balance sheet improves their credit rating. Larger firms lack this advantage because banks and rating agencies add ABS to the level of debt.
    Keywords: securitisation, structured finance, trade receivables
    JEL: G32 D81 G21
    Date: 2006–10–22
  7. By: Liu, Zhen
    Abstract: The US Security and Exchange Commission implemented Regulation Fair Disclosure in 2000, requiring that an issuer must make relevant information disclosed to any investor available to the general public in a fair manner. Focusing on firms that are affected by the regulation, we propose a model that characterizes the behavior of two types of investors\----one professional investor and many small investors\----in the regimes before and after the regulation, i.e., under selective disclosure and fair disclosure. In particular, we introduce the concept of awareness and allow investors to be aware of relevant information symmetrically or asymmetrically. We show that with symmetric awareness, fair disclosure induces both a low cost of capital and a low cost of information, therefore making the market efficient. Also, the professional investor collects an equal level of information under fair disclosure than under selective disclosure. However when small investors are not fully aware, fair disclosure still induces a low cost of capital but may induce a high cost of information. The professional investor may deliberately collect less information under fair disclosure than under selective disclosure. With asymmetric awareness, our theory produces predictions that match the empirical findings by Ahmed and Schneible Jr. (2004) and Gomes, Gorton, and Madureira (2006). They find that small and complex firms are negatively affected by the regulation. We also show that fair disclosure improves the welfare of small investors when they are extremely unaware. Such results are not compatible with the standard symmetric awareness assumption.
    Keywords: Reg FD; Regulation Fair Disclosure; Information Disclosure; Fair Disclosure; Selective Disclosure; Unawareness; Asymmetric Awareness
    JEL: G38 D82
    Date: 2006–11

This nep-cfn issue is ©2006 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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